These included:
* Passage of the budget for 2015, with a revised deficit of Hr 76 billion or 4.1 percent of gross domestic product, which implies a nominal GDP of Hr 1,854 billion or $85 billion at an average exchange rate of Hr 21.7/$1, while the plan is to cut the quasi-fiscal deficit to 8.8 percent of GDP in 2015, from 13.4 percent in 2014.
* Pension reform, including trimming “working pensions” by 15 percent, and also restricting early retirement options for a range of professionals typically in public service. There also appears to be a commitment to phase out the early retirement age of 55 for women over the next decade, moving it to 60. Pension reform is aimed at stemming the Hr 80 billion deficit in the state pension fund – 4.3 percent of GDP.
* Some tax changes, including a hike in the tax on gas production supplied to private consumers by large state-owned gas companies to 70 percent, with the proceeds, Hr 9 billion, used to partially cover subsidies to disadvantaged consumers.
* Utility price hikes for both district utility companies and also for households. Lower consuming households will see prices rise 230 percent to Hr 3,600 per 1,000 cubic meters (around one third of the import price), and those consuming higher amounts a six-fold increase to Hr 7,188 per 1,000 cubic meters. For district heating companies, prices are to rise 2.2 times to Hr 2,934 per 1,000 cubic meters. These increases come into force from April 1, so near the end of the heating season, so limiting the political impact somewhat. Further increases are planned for September 2015 and then March 2015 to move domestic prices towards import prices.
* Passage of a bank owner responsibility act, with the aim of identifying bank owners and encouraging them to recapitalize banks – the bill is also aimed at reining in connected party lending which has emerged as a very significant problem. Note that this comes as the National Bank of Ukraine announced a further three banks as being insolvent (all linked to a prominent local oligarch), including Delta bank, which was the fourth largest by assets and had over 500,000 customers. This brings to 40 the number of banks declared insolvent this year. Assets of these banks will be wound down by the savings deposit insurance fund, and smaller depositors compensated under the savings deposit insurance scheme.
What was perhaps notable in the passage of the above bills was the relative unity shown between President Petro Poroshenko’s bloc in parliament, and also the People’s Party of Prime Minister Arseniy Yatsenyuk.
Notable also was the splintering of support from the smaller pro-European Union parties, including ex- Prime Minister Yulia Tymoshenko’s Batkivshchyna Party and Oleg Lyashko’s Radical Party, plus Samopomich, who all showed more populist instincts.
In the end, the key reform bills secured the support of 230-odd deputies, or a solid majority, but lower than the 300-odd EU reform majority in parliament. The way that the Yatsenyuk and Poroshenko teams worked together is encouraging, given that Kyiv has been awash with rumors of discord in recent weeks – perhaps understandable given the politically difficult nature of the reforms enacted.
Important in securing approval of the bills seems to have been Yatsenyuk’s passionate appeal for support from the two main parties in the coalition, to the effect that failure to pass these reforms would have been tantamount to state suicide, as it would have seen a further delay in IMF credits, the likely further collapse of the currency, financial sector, and likely an uncontrolled default scenario.
The final aspects of the IMF reform bills are slated to be passed this evening.
Also the National Bank of Ukraine appears to have tried to take some positive momentum from the passage of the various reform bills by hiking its main policy rate from 19 percent to 30 percent today with the aim of stabilizing the hryvnia. This is key to ensuring that the budget and indeed the IMF ($17.5 billion loan) is consistent and sustainable – the budget assumes an average Hr rate of 21.7 to the dollar, while the current rate is close to Hr 24-25, and the range over the past week has been up to 35-40.
Important also for budget projections and the IMF program will be evidence of some stabilization in the macro position more generally, and particularly a bottoming out in the recession.
The government has hence spoken of a further 4-5 percent real GDP decline expected for 2015, albeit the NBU’s own recent economic indicator survey showed a 20.1 percent year-on-year decline in economic activity in January (similar falls in the fourth quarter of 2014), after a 9.6 percent year-on-year fall for the full year in 2014 (real GDP likely contracted by around 7 percent). This might require the maintenance of the ceasefire in the east – with a “frozen conflict” now possibly appearing as the best0case scenario for the administration in Kyiv.
